Trump’s Cramped Protectionism vs. Reagan’s Trade Expansionism

The good news is that President Trump wants to boost economic growth, which is a laudable goal after the economy’s sub-par performance during the Obama years.

The bad news is that he may sabotage his good reforms of tax policy and regulation with protectionism.

In a column earlier this month for the Wall Street Journal, Robert Zoellick warns about the likely consequences.

The Trump administration has stacked up a pile of trade cases that will come tumbling down early in 2018. More important than any specific case is the signal of a strategy of economic defeatism. …Mr. Trump’s tactic will likely trigger retaliation from other countries. …“safeguards” to block imports of solar panels and washing machines…doesn’t even require a claim of unfairness. …these amount to an overture to the big show: likely withdrawal from the North American Free Trade Agreement, the U.S.-Korea Free Trade Agreement or both. …The president…relies on the support of economic isolationists who find it easier to blame others than to make America more competitive. Killing Nafta would fit the bill.

Charles Hughes addresses the same topic for Economics 21 and specifically explains that the net effect of trade barriers on solar panels will be to destroy jobs.

President Trump approved new tariffs on solar imports… Manufacturing of solar panels is only one component of the solar industry, which employs between 260,000 and 374,000 workers. Out of this group, only 38,000 work in manufacturing. Even this oversells the number of people whose work would be insulated from competition from imports, as Solar Energy Industries Association estimates that only 2,000 of these solar manufacturing workers make the products covered by the tariffs. Significantly more people work in installation. Their jobs would be at risk from higher solar panel prices that would reduce demand for installations, with one estimate that the tariffs would cost 23,000 U.S. jobs in the first year.

These numbers are not a surprise. There have been many studies looking at the impact of protectionism and lost jobs are the usual result, both because trade barriers create inefficiencies, reduce consumer buying power, and increase input prices.

But don’t take my word for it. Here’s President Reagan talking about trade shortly before he left office (h/t: Cafe Hayek).

By the way, some people try to justify Trump’s protectionism by citing some protectionist policies during the Reagan years.

As explained by Colin Grabow and Scott Lincicome in National Review, that is historical revisionism.

Trumpist efforts to save U.S. jobs through higher tariffs, bilateral trade deals, and lower trade deficits can find no “conservative” justification in Reagan-era trade actions. In fact, it’s just the opposite. The Reagan administration did indeed pursue unilateral import restrictions and foreign-trade “enforcement” actions, but history shows that — unlike protectionist policies proposed by Trump — such moves were intended to liberalize trade… Reagan also often sought to educate his fellow Americans on the U.S. trade balance, even extemporaneously (and correctly) explaining at a 1985 press conference that trade deficits often correlate with job growth and economic vitality. …Reagan negotiated and concluded the 1988 Canada–United States Free Trade Agreement — the basis for the North American Free Trade Agreement (NAFTA). …Reagan administration negotiators also helped launch the Uruguay Round under the General Agreement on Tariffs and Trade (GATT), which would in 1994 strike the single biggest blow for free trade in the last 70 years by establishing the World Trade Organization (WTO).

This paper quantifies the wide-ranging costs of potential increases in worldwide barriers to trade…a coordinated global withdrawal…from all existing bilateral/regional trade agreements, as well as from unilateral preferential schemes coupled with an increase in the cost of traded services, is estimated to result in annual worldwide real income losses of 0.3 percent or US$211 billion relative to the baseline after three years. …Highlighting the importance of preferences, the impact on global trade is estimated to be more pronounced, with an annual decline of 2.1 percent or more than US$606 billion relative to the baseline if these barriers stay in place for three years. Second, a worldwide increase in tariffs up to legally allowed bound rates coupled with an increase in the cost of traded services would translate into annual global real income losses of 0.8 percent or more than US$634 billion relative to the baseline after three years. The distortion to the global trading system would be significant and result in an annual decline of global trade of 9 percent or more than US$2.6 trillion relative to the baseline in 2020.

Anyhow, let’s conclude with a very effective (and concise) video from Matt Ridley on the principle of comparative advantage. It’s about trade between two people, but the same principle applies to trade between nations. Simply stated, trade allows for specialization, which enables higher productivity (and therefore higher wages and living standards).

P.S. I also invite readers to watch excellent videos on trade and protectionism from Professors Tyler Cowen and Don Boudreaux.

[…] In that same interview, I also talked about Trump’s performance. As you might expect, I said nice things about tax reform and regulatory relief, but was rather alarmist about his protectionism. […]

[…] First of all, it’s far too early to give a final grade. And, for what it’s worth, his interim grade is not that great. Good policy on taxes and red tape is being offset by bad policy on spending and trade. […]

[…] support to override a Trump veto. And I have no idea how many congressional Republicans are loyal to free markets rather than Trump, and I also don’t know how many congressional Democrats would vote against […]

Manipulating tariffs and customs and duties was a way of smoothing out trade imbalances without having to manipulate the value of one’s currency, which is far more disruptive to an economy. One of the reasons “free trade” messes things up is precisely because nations start manipulating their currencies instead of doing other things in their natural pursuit of attempting to gain an advantage on all the foreign devils.

As a libertarian economist, I agree with the article that protectionism is not the answer. However, everything in trade is not black and white. My biggest concern over the last 20 years is Chinese “dirty floating” practice of their currency which Trump campaigned rightly as a huge problem. If the Yuan floated freely against the dollar, the Chinese currency might increase in value in excess of 7 times what is pegged today. Thus, making those goods and services not as cheap as they are today for US consumers and less competitive against US businesses. Add in the terrible human rights, work conditions, and lack thereof towards basic/no-brainer environment regulations (Not advocating for environment regulation just common sense). Thus we are talking about fair trade vs free trade. Currently as the model exists with China, our trade with them is completely one sided because all the stated above. If Trump spent the energy getting everyone (1st world) behind forcing China free floating the Yuan, that would provide a century of good news to the US/Canadian/European economies beyond any protectionist behaviors and decisions today and thus make a fair trade environment. I rightly agree with Trump that NAFTA needs to be renegotiated not for goods and services produced between the 3 players but for goods coming into Mexican ports. Goods from SE Asia and other parts of the world arrive at lower tariffs than if it came into US and Canada, but destined for the US and Canadian consumers. Basically, Mexico is acting as a pass-thru/shell game much like tax regulation for multi nationals. Just my two cents or pence depending on where you are from.

“Jsolbakken,,, are you telling us Washing Machines are useless crap???”

The way the EPA forces us to make them now, yeah, they are, especially when combined with the hot water heaters that emit luke warm water.
But seriously, if a nation has to borrow money in order to buy washing machines, that nation cannot afford to be importing any washing machines.
You’ve got to make the connection in your mind between the spiraling debt and the importation of all the crap that we cannot afford and should not be borrowing money to buy. If we are poor and also can’t manufacture our own washing machines, we need to wash our clothes by hand down by the nearest river the way poor people have always had to do it.

“insulated from competition”
Neo-Protectionism is not about insulating domestic businesses from competition. It’s about reducing the level of consumption of all sorts of crap that nobody really needs yet they borrow fiat money in order to buy it because they think it’s cheep. By slapping the tariff on imported crap it does give a bit of an advantage to domestic production, but that is a side benefit of marginal importance. The real impact is on the benefits derived from people not borrowing so much money to buy worthless stupid crap that has to be imported. People will still buy worthless useless crap they don’t need, just not as much of it.